Uncertainty, the Fed, and the Economy

The New York Times published this opinion piece recently, discussing the Fed’s continuing decision to delay raising rates. While the entire article is interesting, I believe that the final paragraph is the most insightful:

Adding to the frustration is that Fed policy is not to blame for the economy’s underperformance. Congress bears much of the blame because of its tightfisted federal budgets when more government spending is needed to offset feeble spending and investment in the private sector. Still, sound policy making by the Fed requires answering to conditions as they are, not as policy makers might wish they were.

Right now, we should be spending money to stimulate the economy– cutting back is incredibly short-sighted, and could seriously damage the economy. We should look back at other economic downturns from the past– the Great Depression, for example, was ended not by restricting government spending, but by massively increasing it (and by abolishing the gold standard, which let to the restriction in the first place)– and learn from them. Economists have studied recessions for many years, and the Fed has done an admirable job in regulating the U.S. economy through this entire mess. Politicians, however, often don’t understand the data, or are politically unable to make the best long-term policy. For this reason, they should seek to reduce uncertainty in U.S. markets.

Economic uncertainty is a larger problem in the United States than we may care to admit. John C. Williams, President and CEO of the Federal Reserve Bank of San Francisco, gave a 2012 speech in which he said that uncertainty was one of the largest problems facing the U.S. economy today:

By almost any measure, uncertainty is high. Businesses are uncertain about the economic environment and the direction of economic policy. Households are uncertain about job prospects and future incomes. Political gridlock in Washington, D.C., and the crisis in Europe add to a sense of foreboding. I repeatedly hear from my business contacts that these uncertainties are prompting them to slow investment and hiring. As one of them put it, uncertainty is causing firms to “step back from the playing field.” Economists at the San Francisco Fed calculate that uncertainty has reduced consumer and business spending so much that it has potentially added a full percentage point to the unemployment rate.

Obviously, with unemployment at 5.0% today,1 having uncertainty raise the unemployment a full percentage point is no small matter. And on average, economic uncertainty is increasing—according to data collected by Scott Baker, Nicholas Bloom and Steven J. Davis in “Measuring Economic Policy Uncertainty” over at PolicyUncertainty.com, economic uncertainty has been trending upwards for the past fifteen years.

Obviously, this trend is heavily influenced by the 2008 recession, but I find it interesting that it may be beginning to rise again. This is possibly a result of the fluctuating oil markets, combined with the slowdown of China’s economy; but no matter the cause both the Fed and the government should seek to reduce uncertainty and continue to promote stability in the economy.

When he gave that speech, the unemployment rate was at 8.3%, and the Economic Uncertainty Index (EUI) was at 178.3; today the latest numbers for the EUI place the United States near 98.3. I was unable to find any data correlating the EUI with specific unemployment rates, so at this time I cannot estimate how much of our present unemployment is a result of uncertainty in the economy. ↵